Wednesday, September 28, 2011

Why Bridget Should Work for the Federal Reserve

We need to explain why money has a certain exchange value on the market. It won't do (so these economists thought) to merely explain this by saying people have a marginal utility for money because of its purchasing power. After all, that's what we're trying to explain in the first place—why can people buy things with money?

Mises eluded this apparent circularity by his regression theorem. In the first place, yes, people trade away real goods for units of money, because they have a higher marginal utility for the money units than for the other commodities given away. It's also true that the economist cannot stop there; he must explain why people have a marginal utility for money. (This is not the case for other goods. The economist explains the exchange value for a Picasso by saying that the buyer derives utility from the painting, and at that point the explanation stops.)

People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.

But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money?

No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on.

So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange.

The critical difference between fiat and commodity money is that fiat money can be produced in virtually unlimited quantities at very low cost. In this respect, the person who controls the printing press of a fiat currency is in a much stronger position than the person who owns a gold mine. With just some ink and paper, the printing press can create a million new dollars quite easily, whereas the owner of the gold mine would need to hire workers to operate expensive equipment in order to bring forth new amounts of gold having the same market value.

This is a basic misunderstanding of the markets by the media. There is a reason she is a reporter and not an economist. It is not gold that is not backed by anything, it is the dollar. And to say the dollar is backed by the government is hilarious.It is devalued by the government, it is printed by the government, but backed by them? Try forced by them.

The underpinning of the dollar is government debt – a promise to pay dollars – and then it is multiplied on top of this base through the banking system. This definition is fully circular, not just recursive. The dollar is essentially a highly-leveraged derivative of government debt, which is ultimately payable in, uh, dollars.

With that said, the dollar is money not just because of Misesian regression. The core of the underlying value of a dollar is in its demand for the payment of taxes and other government fees, which constitute a significant percentage of the economy. Even absent any historic tie to gold, the government requirement for people to pay it dollars will give the dollar value. If instead the government required people to pay it cryptographically-signed numbers (e.g., bitcoins) to prevent property confiscation and imprisonment, these would gain a value. Based upon this value, the dollar would probably become money even without other legal tender provisions because it otherwise has the qualities of proper money noted by Aristotle and the Austrians.

Obviously Mises’ regression provides a smooth transition between a commodity with a long history of a relative value and the dollar’s initial indeterminate value as protection against specified government aggression, but I believe that would still ultimately occur without the regression from gold.

So finally, when you really think about it, the underlying value is that of a Mafioso protection racket, and the dollars in your pocket are leveraged derivatives of this protection.

I would take it a step further and say Gold is money backed by Physics.

How is gold created? From Supernovas. This happens rarely. Most stars are too small, eg the Sun. Some are too big and become black holes instead. Gold is just one of the many heavy elements created from such stars collapsing on themselves, then exploding.

I think she might be smarter/shrewder than Miss Teen South Carolina. I think she uses the term "backed" in the same way that Krugman and Mao Tse Tung use it--as in backed up by the barrel of a gun and at the point of the soldier's bayonet. After all everybody knows that we wouldn't have anything we need (water, electricity, a medium of exchange, etc.) if the gunverment didn't make it for us.

By the way, thank you very much Bob for including the Murphy digression on the regression theorem. I remember as a 5th grader being mystified at why people valued money. I couldn't find anything in the encyclopedia that seemed to address it.

I wonder if any command economists have ever tried to refute the money regression theorem or tried to prove that subjective exchange value arises in the minds of individuals ultimately because of the gunverment's bayonets?

I've no doubt some socialist/communist/Keynesians have TRIED, but I doubt any of them have produced any coherent refutation of the regression theorem.

Like libertarianism, with its simple, easily understood and unassailable "first premise"- your rights end where mine begin- it is difficult to refute something that is so prima facie obvious, despite the fact that schools, the media, and the government (or are those 3 redundant?) are founded on the subversion of these ideals.